Rajiv Shah has reoriented the U.S. Agency for International Development to spend less money while making a deeper impact.

Not long ago, the industrialized world interacted with developing nations mostly through the decisions of heads of state like President Obama and others who gathered for the G-8 meeting of major economies in Northern Ireland this week.

The choices those leaders make about foreign aid still have huge ramifications for developing countries. But that money is no longer the principal lever through which the United States and other rich countries affect life in nations across Africa, Asia, and elsewhere that are poised between rising opportunities and enduring challenges.

Around the time that President Kennedy signed the 1961 law creating the U.S. Agency for International Development, government-assistance represented about 85 percent of all the capital flowing into the developing world. Today, that aid represents only about one-tenth of the capital entering those countries. The combined total of private business investment, philanthropic initiatives, and money sent home by immigrants now dwarfs the direct government transfers. If the U.S. government can help coordinate and deepen those flows, it could vastly magnify the impact of its own dollars in confronting some of the planet’s most intractable problems.

With little notice, Rajiv Shah, the dynamic young USAID administrator, is reengineering his agency around that critical insight. Since arriving in late 2009, Shah has broadened USAID’s focus from its traditional mission of funding direct services toward a role of catalyzing and leveraging the diverse “constellation” of groups—from multinational corporations to globe-spanning nonprofit groups, such as the Bill and Melinda Gates Foundation—now operating in many of the world’s neediest places. “We have tried to put in place a new model as so many more actors have gotten involved,” Shah says. “There’s a new constellation of engagement on these issues that make possible great outcomes.”

Shah’s approach may be most clearly embodied in the open competitions the agency has launched to find fresh ideas for development. These efforts follow the same strategy as the Obama administration’s Race to the Top Fund, which leveraged federal education dollars by providing grants to states that proposed the most-inventive reforms. In that spirit, USAID has encouraged innovation by creating “grand challenges” that fund start-up ideas to improve infant mortality, increase literacy, promote clean energy, and fight corruption.

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The agency’s Development Innovation Ventures program extends that idea by funding not only start-ups but also projects intended to reach country-wide size. Three years in, the effort has received more than 3,000 applications and has invested, in venture capital-style, more than $25 million in 60 projects. From the outset, USAID required applicants to show that their ideas could be scaled—and could develop sustainable funding sources to replace the government dollars. The results produced initiatives tackling challenges from improving water sanitation to treating children for intestinal worms that have also attracted millions of corporate and philanthropic dollars.

The same instinct is evident in the agency’s proliferating public-private partnerships, which have ranged from agreements with high-tech companies such as Cisco and Google to improve digital access in Myanmar to an ingenious effort to fight corruption by promoting digital transfers of money in countries such as Afghanistan. This push to partner has peaked in the “New Alliance” for African agricultural development that Obama introduced at last year’s G-8 meeting at Camp David. Under that initiative, six African governments (including Ethiopia, Ghana, and Mozambique), donor countries, and private companies formed partnerships to accelerate private investment in those nations’ agricultural development, and ultimately to lift 50 million people from poverty over 10 years. So far, the approach has generated both reforms to local-government policies impeding production (Tanzania, for one, revoked an export ban) and an estimated $3.7 billion in private investment pledges; the first year showed enough promise that three more African nations, led by Nigeria, joined the alliance this month.

To Shah, a former chief scientist at the Agriculture Department and senior official at the Gates Foundation, all of these projects extend USAID’s reach and allow it to channel investments far beyond those available through its direct aid budget. Unlocking more private resources for development goals, Shah says, “is an absolute game changer.”

Development groups have generally welcomed this strategy, although not without qualification. Advocates caution that these partnerships require close attention to ensure they serve local communities as much as global companies (for instance, to guarantee that the African agriculture deals protect small farmers). Eric Muñoz, senior policy adviser at Oxfam America, says it’s also critical that governments don’t view private dollars as a substitute for traditional foreign aid, which often meets needs that private investors won’t address. “At best, these things can work together,” he says, “but, at worst, they can completely contradict each other.”

Those concerns are valid. But at its most effective, Shah’s approach reflects the Bill Clinton-era insight of authors David Osborne and Ted Gaebler that government works best when it seeks to “steer, not row.” At a time of Washington stalemate, USAID is recharging by connecting with the undiminished dynamism of American society beyond the Beltway. Not a bad lesson for everyone else in the capital.

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